southeastern penn. trans. auth. v. zuckerberg et al - shareholder class action complaint.pdf

8/17/2019 Southeastern Penn. Trans. Auth. v. Zuckerberg et al - shareholder class action complaint.pdf

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IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

SOUTHEASTERN PENNSYLVANIA

TRANSPORTATION AUTHORITYindividually, and on behalf of all thosesimilarly situated,

Plaintiff,

v.

MARK ZUCKERBERG, SHERYLSANDBERG, MARC ANDREESSEN,

ERSKINE B. BOWLES, SUSANDESMOND-HELLMANN, REEDHASTINGS, JAN KOUM, PETER A.THIEL and FACEBOOK, INC.,

Defendants.

::

::::::::::

:::::::

C.A. No. ___________

VERIFIED CLASS ACTION COMPLAINT

Plaintiff, Southeastern Pennsylvania Transportation Authority (“SEPTA” or

“Plaintiff”), by and through its undersigned counsel, alleges upon knowledge as to

itself and its own actions, and on information and belief, including the

investigation of counsel and review and analysis of publicly available information

as to all other matters:

SUMMARY OF THE ACTION

1. SEPTA brings this action on behalf of itself and as a class action on

behalf of the stockholders of Facebook, Inc. (“Facebook” or the “Company”),

EFiled: May 06 2016 04:01PM EDTTransaction ID 58958691

Case No. 12309-


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other than the named defendants, for breaches of fiduciary duty arising from an

effort to reclassify the Company’s shares as announced on April 27, 2016

(“Reclassification”). As detailed herein, Facebook and its Board of Directors

(“Board”) openly acknowledge that the Reclassification effort is an attempt to

entrench the Company’s founder, Chairman and Chief Executive Officer (“CEO”),

Mark Zuckerberg (“Zuckerberg”), as controlling stockholder of Facebook by

creating a non-voting class of Facebook stock (“Class C”) in order to preserve his

voting power into perpetuity. Facebook currently has two classes of stock: Class

A common stock and Class B common stock. Class A shares entitle stockholders

to one vote per share and Class B shares carry ten (10) votes each. Zuckerberg

owns nearly 4 million Class A shares and 468 million Class B shares, giving him

overall voting power of 60.1%.

2.

Under the terms of the Reclassification, the Board will declare and

pay a dividend of two shares of non-voting Class C stock for each outstanding

share of Class A common stock and Class B common stock. The Company stated

that it expects the market price for the shares of Class A common stock to reflect

the effect of a three-for-one stock split. The Class C shares will trade separately on

the NASDAQ, which analysts believe will likely trade at a discount to the Class A

stock due to the lack of voting rights. This distribution of non-voting stock will

allow Zuckerberg to fulfill his purported mission of donating 99% of his Facebook


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stock to charitable causes over the course of his lifetime and will also allow

Facebook to purchase other companies or issue stock to employees without

diluting Zuckerberg’s voting power or diminishing his iron-clad grip over

Company management and operations (which includes the ability to appoint the

entire Board of Directors).

3. Pursuant to a Preliminary Proxy Statement (“PPS”), filed with the

Securities and Exchange Commission on April 27, 2016, the Reclassification is

being submitted for a stockholder vote and is technically subject to stockholder

approval of a majority of Facebook’s outstanding shares. However, with

Zuckerberg’s 60.1% voting stake and without the benefit of a majority-of-the

minority condition, the Reclassification is a fait accompli.

4. Zuckerberg and the Company have openly admitted that the

Reclassification is intended to and will allow Zuckerberg to keep control of the

Company. In December 2015, Zuckerberg announced that he and his wife created

a limited liability corporation to which they would donate 99% of their Facebook

stock over the course of their lifetimes for charitable purposes. In addition, the

Company has said it will use stock to acquire new companies, employees or

technologies and to compensate its employees. While these actions would, under

the Company’s current capital structure, dilute Zuckerberg’s voting power and

threaten his majority control of the business, the Reclassification would allow him


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to perpetuate his control over the Company while diluting the voting power of the

public stockholders.

5. A “Special Committee” of Facebook directors approved the deal, but

did not meaningfully bargain with Zuckerberg to obtain value in exchange for the

extraordinary benefit that is being bestowed upon him. The Special Committee:

(a) agreed to allow Zuckerberg to present the Reclassification to astockholder vote at the upcoming annual meeting, without any

provision for approval by a majority of the public stockholders,making the Reclassification a fait accompli, and providing the

public stockholders with no say;

(b) never sought to have Zuckerberg pay the costs for the SpecialCommittee’s financial and legal advisors nor for the SpecialCommittee fees in connection with the Reclassification;

(c) never sought or received an opinion from its financial advisorthat the Reclassification was fair to the public Class Astockholders;

(d) obtained “concessions” from Zuckerberg that are essentiallymeaningless, thus negating any possible claim that there wasarm’s-length bargaining;

(e) allowed director Marc Andreessen (“Andreessen”) to serve onthe Special Committee as a “disinterested” member despite theclose business ties between Facebook and Andreessen’s venturecapital firm, Andreessen Horowitz;

(f)

never had its financial advisor place a value or range of valueson the Reclassification, from Zuckerberg’s perspective;

(g) did not prearrange compensation for the Special Committee,leaving its eventual compensation to be decided by the


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Compensation & Governance Committee, of which Andreessenis a member;

(h) did not adopt any independent oversight mechanism to ensure

that future issuances of Class C shares do not unduly benefitZuckerberg;

(i) failed to bargain for the right of public Class A stockholders toelect even one independent director, so that such stockholdersmight have a voice; and

(j) failed to provide for any compensation for the Class Astockholders whose investments will be adversely affected byhaving their holdings cleaved into voting and non-votingshares, with their meaningful consent or approval.

6. The action challenges the approval process of the Reclassification and

the terms of the Reclassification. The Reclassification is not fair to Facebook’s

public stockholders and is the product of self-dealing by Zuckerberg. Zuckerberg

is opportunistically putting himself in an advantageous position to obtain the non-

ratable benefit of perpetual control over the Company, at the expense of

Facebook’s public stockholders and without providing Facebook’s stockholders

with a meaningful opportunity to have their voices heard. Given that Zuckerberg

is the founder, Chairman, CEO and controlling stockholder of Facebook,

Facebook’s management and Board face divided loyalties and have not acted in the

best interests of the public stockholders. The entire fairness standard also applies

to the Reclassification, as Zuckerberg is Facebook’s controlling stockholder and is

extracting the non-ratable benefit of perpetual control of the Company.


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7. For these reasons and as set forth more fully herein, Plaintiff seeks to

prevent the Reclassification, recover damages or to obtain such other relief as is

appropriate. The action asserts claims: (1) for breaches of fiduciary duty of

loyalty and care against the directors of Facebook; (2) for breaches of fiduciary

duty of loyalty and care against Defendant Sandberg as an officer and director of

Facebook; and (3) for breaches of fiduciary duty of loyalty and care against

Defendant Zuckerberg as an officer and director and as controlling stockholder of

Facebook.

PARTIES

8. Plaintiff SEPTA owns and has owned shares of Facebook, Inc.

common stock throughout the entire relevant period.

9. Defendant Facebook, Inc. is a corporation organized and existing

under the laws of the State of Delaware, with its principal place of business at 1601

Willow Road, Menlo Park, California 94025. Facebook is an online social

networking service.

10. Defendant Mark Zuckerberg is the founder of the Company and has

served as the Company’s CEO and as a member of the Board since July 2004 and

as Chairman of the Board since January 2012. Zuckerberg owns 3,999,241 shares

of Class A common stock, 418,981,071 shares of Class B common stock and has a

voting proxy with respect to an additional 48,892,913 shares of Class B common


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stock. Zuckerberg’s combined beneficial ownership provides him with a voting

stake of 60.1% of Facebook stock. Zuckerberg is Facebook’s largest and

controlling shareholder.

11. Defendant Sheryl Sandberg (“Sandberg”) has been the Company’s

Chief Operating Officer since March 2008 and a member of the Board since June

2012. Sandberg served in various positions at Google, Inc. (now known as

Alphabet, Inc.), from November 2001 to March 2008, most recently as Vice

President, Global Online Sales & Operations. Sandberg has been a director of

online survey development cloud-based software company SurveyMonkey since

July 2015.

12. Defendant Marc Andreessen has been a member of the Board since

June 2008. Andreessen is a co-founder and is a general partner of Andreessen

Horowitz, a venture capital firm, since July 2009. Andreessen co-founded and

served as Chairman of Opsware, Inc. (formerly known as Loudcloud Inc.), a

software company. He also served Chief Technology Officer of America Online,

Inc., an Internet services company. Andreessen was co-founder of Netscape

Communications Corporation, a software company, serving in various positions,

including Chief Technology Officer and Executive Vice President of Products.

Andreessen also serves on the board of Hewlett-Packard Enterprise Company and

several private companies. Andreessen previously served as a member of the


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board of eBay Inc. and Hewlett-Packard Company. Andreessen is a member of the

Compensation & Nominating Committee and was a member of the Special

Committee that reviewed and approved the Reclassification.

13. Defendant Erskine B. Bowles (“Bowles”) has been a member of the

Board since September 2011. Bowles was a member of the Special Committee

that reviewed and approved the Reclassification.

14. Defendant Susan Desmond-Hellmann (“Desmond-Hellman”) has

been a member of the Board since March 2013. Desmond-Hellmann is currently

the CEO of the Bill & Melinda Gates Foundation, the largest private foundation in

the world, with purported aims to enhance healthcare and reduce extreme poverty,

and in America, to expand educational opportunities and access to information

technology. Desmond-Hellman was a member of the Special Committee that

reviewed and approved the Reclassification.

15. Defendant Reed Hastings (“Hastings”) has been a member of the

Board since June 2011. Hastings has served as CEO and Chairman of Netflix,

Inc., a provider of Internet subscription service for movies and television shows,

since 1999. Hastings previously served on the board of Microsoft Corporation.

16. Defendant Jan Koum (“Koum”) has been a member of the Board

since October 2014. Since February 2009, Koum is co-founder and CEO of


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WhatsApp Inc. (“WhatsApp”), a cross-platform mobile messaging application

company and Facebook’s wholly-owned subsidiary.

17. Defendant Peter A. Thiel (“Thiel”) has been a member of the Board

since April 2005. Thiel is currently President of Thiel Capital, an investment firm,

since 2011, a partner of Founders Fund, a venture capital firm, since 2005, and

President of Clarium Capital Management, a global macro investment manager,

since 2002. Thiel was one of Facebook’s, and Zuckerberg’s, early venture capital

backers. In 1998, Thiel co-founded PayPal, Inc., an online payment company,

where he served as CEO, President and Chairman from 2000 until its acquisition

by eBay in 2002.

18. As directors and/or officers of the Company, the Defendants

Zuckerberg, Sandberg, Andreessen, Bowles, Desmond-Hellmann, Hastings, Koum

and Thiel (collectively, the “Individual Defendants”), are in a fiduciary

relationship with the Company, Plaintiff and the public stockholders of Facebook,

and owe the highest obligations of due care, loyalty, full and candid disclosure and

good faith and fair dealing.

CLASS ACTION ALLEGATIONS

19. Plaintiff brings this case on its own behalf and as a class action

pursuant to Chancery Court Rule 23, on behalf of all holders of Class A common

stock of the Company, except defendants herein and their affiliates, who are


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threatened with injury arising from the Individual Defendants’ actions as are

described more fully below (the “Class”).

20. This action is properly maintainable as a class action.

21. The Class is so numerous that joinder of all members is impracticable.

As of March 31, 2016, Facebook had 2,311,052,873 shares of Class A common

stock outstanding owned by thousands of shareholders who are scattered

throughout the United States.

22.

There are question of law and fact common to the Class including,

inter alia, whether:

a. the Individual Defendants have breached their fiduciary duties

of loyalty and care to Plaintiff and the Class in connection with

the Reclassification;

b.

Defendant Zuckerberg, in his capacity as director and officer

and controlling stockholder of Facebook, has breached his duty

of loyalty by opportunistically asserting his control to achieve

the Reclassification in order to perpetuate his control over the

Company;

c. Defendant Sandberg, in her capacity as director and officer of

Facebook, has breached her duty of loyalty in connection with

the Reclassification;


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d. Plaintiff and the other members of the Class are being and will

continue to be injured by the wrongful conduct alleged herein

and, if so, what is the proper remedy and/or measure of

damages; and

e. Plaintiff and the other members of the Class will be damaged

irreparably by Defendants’ conduct.

23. Plaintiff is committed to prosecuting the action and has retained

competent counsel experienced in litigation of this nature. Plaintiff’s claims are

typical of the claims of the other members of the Class, and Plaintiff has the same

interests as the other members of the Class. Plaintiff is an adequate representative

of the Class.

24. The prosecution of separate actions by individual members of the

Class would create the risk of inconsistent or varying adjudications with respect to

individual members of the Class, which would establish incompatible standards of

conduct for Defendants, or adjudications with respect to the individual members of

the Class, which would as a practical matter be dispositive of the interests of the

other members not parties to the adjudications or substantially impair or impede

their ability to protect their interests.


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25. Defendants have acted, or refused to act, on grounds generally

applicable to, and causing injury to, the Class and, therefore, injunctive relief on

behalf of the Class, as a whole, is appropriate.

SUBSTANTIVE ALLEGATIONS

A. BACKGROUND

26. Facebook, founded in 2004 by Zuckerberg, constructs programs that

enable people to connect and share through mobile devices and personal

computers, by accessing its products, including:

Facebook. A mobile application and website that enables

people to connect, share, discover, and communicate with eachother on mobile devices and personal computers.

Instagram. A mobile application that enables people to take

photos or videos, customize them with filter effects, and sharethem with friends and followers in a photo feed or send them

directly to friends.

Messenger. A messaging application available for mobile andweb on a variety of platforms and devices, which enables

people to reach others instantly and simply, and also enables businesses to engage with customers seamlessly and securely.

WhatsApp. A fast, simple and reliable mobile messagingapplication that is used by people around the world and isavailable on a variety of mobile platforms.

Oculus. A virtual reality technology and content platform power product that allows people to enter a completelyimmersive and interactive environment to play games, consumecontent, and connect with others.


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Facebook generates its revenue from selling advertising placements on Facebook,

Instagram and third-party applications and websites to marketers, which let

marketers reach people based on a variety of factors.

27. In 2009, Facebook paved the road for Zuckerberg’s continued control.

Facebook announced that it was creating a dual-class stock structure for itself and

converting all of its current shares into Class B shares, which would have ten (10)

votes each on matters of corporate governance and that Class A shares, which

would be sold in an initial public offering, would carry one vote.

28. The Company went public in May 2012, with its initial public offering

raising over $6.76 billion. Zuckerberg and other Facebook insiders sold shares in

the offering but retained all Class B common stock.

29. The dual class stock structure had its intended effect and solidified

Zuckerberg’s domination of Facebook, allowing him a certain level of insulation

from dissenting views. As was contemplated, Zuckerberg, who owns nearly 4

million shares of Class A stock and 468 million shares of Class B stock, currently

controls 60.1% of the Company’s voting power, providing him with control over

the Company. In Facebook’s 10-K for the year ended December 31, 2015, the

Company stated:

Our CEO has control over key decision making as a result of his

control of a majority of our voting stock.


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Mark Zuckerberg, our founder, Chairman, and CEO, is able toexercise voting rights with respect to a majority of the voting power ofour outstanding capital stock and therefore has the ability to controlthe outcome of matters submitted to our stockholders for approval,including the election of directors and any merger, consolidation, orsale of all or substantially all of our assets. This concentrated controlcould delay, defer, or prevent a change of control, merger,consolidation, or sale of all or substantially all of our assets that ourother stockholders support, or conversely this concentrated controlcould result in the consummation of such a transaction that our otherstockholders do not support. This concentrated control could alsodiscourage a potential investor from acquiring our Class A commonstock due to the limited voting power of such stock relative to theClass B common stock and might harm the trading price of our

Class A common stock. In addition, Mr. Zuckerberg has the ability tocontrol the management and major strategic investments of ourcompany as a result of his position as our CEO and his ability tocontrol the election or replacement of our directors.

. . .As a stockholder, even a controlling stockholder, Mr. Zuckerberg isentitled to vote his shares, and shares over which he has voting controlas governed by a voting agreement, in his own interests, which maynot always be in the interests of our stockholders generally.

30.

Facebook’s recent acquisitions evidence Zuckerberg’s unfettered

control over Facebook. For example, in Facebook’s $1 billion acquisition of

Instagram, Zuckerberg conducted negotiations, mostly on his own, in three days

and waited until the deal was all but done before presenting the acquisition to the

Board and less than 24 hours before it approved it. According to an April 18, 2012

Wall Street Journal article, entitled “In Facebook Deal, Board Was All But Out of

the Picture,” the Board “[w]as told, not consulted” and “Facebook’s board did vote


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on the deal, according to people familiar with the matter, though it was largely

symbolic.”

31. A similar pattern has since been repeated, with Zuckerberg driving the

$2 billion acquisition of WhatsApp and the $2 billion acquisition of Oculus and

deciding how much Facebook would pay for these companies with apparently little

or no input from the Board. According to a February 20, 2014 Bloomberg

Technology article, entitled “Zuckerberg Bonded With WhatsApp CEO Over

Coffee and Dinners,” talks between Zuckerberg and Koum regarding a WhatsApp

acquisition became serious at a dinner at Zuckerberg’s house when Zuckerberg

proposed their companies join together and Koum join the Board. Koum took a

few days to think it over, and five days later, Koum showed up at Zuckerberg’s

house and they negotiated the $2 billion price. Similarly, according to a March 25,

2014 Wall Street Journal article, entitled “Facebook to Buy Virtual Reality Firm

Oculus for $2 Billion,” Zuckerberg signaled to Oculus CEO, Brendan Iribe, that he

was interested in acquiring Oculus and the deal was done at Facebook’s

headquarters in a matter of days.

32. Zuckerberg also controls the Board. Facebook does not maintain a

separate committee charged with director nominations. According to Facebook’s

PPS, the Board “shall also consider advice and recommendations” from

Zuckerberg for potential candidates for nomination to the Board. Moreover,


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Facebook’s Board is unclassified, and will remain so unless and until Zuckerberg

no longer has control. This means Zuckerberg controls who gets elected to the

Board each year. On February 18, 2015, in a deposition taken in Espinoza v.

Zuckerberg, C.A. No. 9745-CB (Del. Ch.), Zuckerberg said of Facebook’s Board,

“[t]hese are the people who I want and – and who I think will serve the company

best.” According to a February 2014 article in Bloomberg Technology, entitled

“Zuckerberg Bonded With WhatsApp CEO Over Coffee and Dinners,” over two

years before Facebook’s 2014 acquisition of WhatsApp, in the Spring of 2012,

Zuckerberg invited WhatsApp CEO, Defendant Koum, to coffee, and soon the two

became friends, meeting frequently for dinners and hiking together. When

Facebook ultimately acquired WhatsApp, Koum, Zuckerberg’s friend, joined the

Board.

33.

Zuckerberg’s control over the Board is unsurprising. A July 5, 2012,

New York Times article, entitled “In Silicon Valley, Chieftains Hold Sway With

Few Checks and Balances,” stated:

In the [Silicon] Valley, however, the idea of the visionary chiefexecutive dominates, and there may be little room for input fromdirectors.

This sentiment was voiced recently by Reed Hastings, the chiefof Netflix and a director for Facebook and Microsoft. Speaking at theStanford Directors’ College, a yearly retreat where public companydirectors learn the art of being a director, he reportedly cast skepticismon the traditional board model.


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According to Kevin M. LaCroix of the D&O Diary, “Hastingssaid several times that for the board of a large publicly tradedcompany ‘the fundamental job is to replace and compensate theC.E.O.’ Where the company has the resources to hire outsideconsultants as needed, it is not the board’s role to offer counsel oradvice.”

…

Even if these boards did feel free to challenge these founders,they are tight and interlocking. Two of the directors of Netflix sit onthe board of LinkedIn. Reid Hoffman, the chairman and co-founderof LinkedIn, sits on the board of Zynga, which has a director who is a

partner of Kleiner Perkins Caufield & Byers and sits on the board of

Klout and Amazon.com. Mr. Hastings is joined on the board ofFacebook by Marc Andreessen, one of the biggest deal makers inSilicon Valley who sits on the board of eBay. And so on.

These directors all work in the same environment, often investin one another’s companies and have little incentive to challenge thechief executive because it will affect their own ability to serve asdirectors or participate in the next big things in Silicon Valley.

B. THE RECLASSIFICATION – ZUCKERBERG’S DEMAND TO

RETAIN CONTROL

Zuckerberg Approaches the Board to Perpetuate His Control of Facebook

34. In August 2015, Zuckerberg approached the Board to discuss the idea

that he might want to sell or gift his shares to further his philanthropic endeavors

and that if the Company continued to make acquisitions with Facebook stock and

to compensate employees with stock, he might lose control of the Company.

35. On August 20, 2015, the Board established a Special Committee to

review, analyze, evaluate and negotiate a potential reclassification of Facebook


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capital stock or voting structure in order to maintain Zuckerberg’s control over the

Company. The Board appointed Andreessen, Bowles and Desmond-Hellmann as

Special Committee members, and the Special Committee retained Wachtell,

Lipton, Rosen & Katz (“Wachtell”) to act as its legal counsel and Evercore Group

L.L.C. (“Evercore”) to act as its financial advisor. The Special Committee’s work

was at the sole expense of the Company.

36. On December 1, 2015, Zuckerberg publicly announced that, during

his lifetime, he will gift or otherwise direct substantially all of his shares of

Facebook stock “to further the mission of advancing human potential and

promoting equality by means of philanthropic, public advocacy, and other

activities for the public good.” For this purpose, Zuckerberg established a new

entity, the Chan Zuckerberg Initiative, LLC (“LLC”), with the mission to “advance

human potential and promote equality in areas such as health, education, scientific

research and energy.” Zuckerberg will control the voting and disposition of any

shares held by such entity. Zuckerberg represented that he planned to sell or gift

no more than $1 billion of Facebook stock each year for the next three years and

that he intended to retain his majority voting position in Company stock for the

foreseeable future.


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The Special Committee Is Conflicted

37. While the Special Committee was composed of non-executive

directors, the Board ignored Defendant Andreessen’s significant ties to Facebook

and Zuckerberg. Defendant Andreessen’s venture capital firm, Andreessen

Horowitz, which invests in start-up technology companies, was one of the earliest

and biggest investors in Facebook and an early investor in startups Oculus VR and

Instagram, which were ultimately acquired by Facebook for billions of dollars.

Andreessen Horowitz made $78 million off its $250,000 seed investment in

Instagram. Certain funds affiliated with Andreessen hold shares of the Company’s

Class B common stock in escrow, or that may be received pursuant to the

contingent payment earn-out, in connection with Facebook’s acquisition of Oculus

VR, Inc. According to a July 5, 2012, New York Times article, entitled “In Silicon

Valley, Chieftains Hold Sway With Few Checks and Balances,” Andreessen stated

on the “Charlie Rose” show that Zuckerberg is one of the “best C.E.O.s in the

world.”

38. Additionally, Defendant Desmond-Hellmann, as CEO of the largest

philanthropic foundation in the world, is sympathetic to Zuckerberg’s wishes to

donate his stock to LLC, which has aims that purportedly coincide with and may

benefit the Bill & Melinda Gates Foundation. And, Defendant Bowles, when he

joined the Board, lionized Zuckerberg, stating “Facebook has clearly emerged as a


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transformative force in the world. . . . It’s no wonder given the talent Mark

[Zuckerberg] has put in place and the company’s focus and dedication to its

mission. I’m really looking forward to getting to work and helping Facebook

however I can.” Moreover, the PPS says that any compensation to the Special

Committee for advising on the Reclassification would be determined at a later time

by the Compensation & Governance Committee, of which Andreessen is a

member. Given the known desire of Zuckerberg to reclassify Facebook’s stock,

this effectively incentivized the Special Committee to approve the Reclassification

and created a beneficial de facto contingency fee arrangement with the Special

Committee by implicitly tying future compensation to plan approval and allowing

a committee on which Andreessen sat to determine the fees to be paid.

The Special Committee Process Does Not Reflect Arms-Length

Negotiations

39. Since its formation in August, the Special Committee met “numerous”

times and also had “frequent” conversations about the Reclassification. While the

Special Committee received advice “in evaluating the benefits and disadvantages

of the company implementing a reclassification versus maintaining the status quo,”

at no time did it raise any concerns about a reclassification.

40. Instead, with a “belief that a significant portion of the success realized

by [Facebook] has been attributable to Mr. Zuckerberg’s leadership, creative

vision, and management abilities, and that Mr. Zuckerberg’s continued leadership


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role in the Company is likely to provide substantial benefits to [the Company] and

to our stockholder,” the Special Committee’s discussions focused only on the

terms of a potential reclassification. There is no indication that Defendant

Zuckerberg ever expressed an intention to disassociate from the Company. Rather,

he simply demanded largesse.

41. Moreover, the Special Committee’s “negotiations” with Zuckerberg,

centered on terms governing Zuckerberg’s actions in circumstances where he

would lose control of his own volition or in the case of death, disability or

termination for cause. Specifically, the Special Committee negotiated and caused

Zuckerberg to entered into a so-called Founder Agreement, pursuant to which

Zuckerberg agreed:

(a) not to dispose of any Class B common stock, if he would ownless than a majority of the Class B common stock, unless hefirst caused all shares to automatically convert to Class Acommon stock;

(b) that his ownership would be subject to four new automatic“sunset” triggers (Zuckerberg’s death, Zuckerberg’s disability,the termination of Zuckerberg for cause and the voluntaryresignation of Zuckerberg), to reduce the length of the “sunset”transition period proposed originally by Zuckerberg forvoluntary leaves of absence or a resignation, as a result of

which he can only avoid triggering an automatic “sunset” ifsuch action is in connection with government office;

(c) to meet with the Board to discuss succession planning withrespect to the transfer, voting and conversion of Zuckerberg’sshares during any “sunset” transition period;


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(d) that during any “sunset” transition period, a vice president ormore senior officer of the company (selected by Zuckerbergfollowing discussion with “independent” board members) willhold the sole proxy over the transfer, voting and conversion ofhis shares; and

(e) to equal treatment of shares in the event of any merger, tenderoffer or similar business combination.

42. The Special Committee’s “negotiations” were tepid, and did not

approximate arm’s length bargaining. The Founder Agreement is not meaningfully

different from the status quo. The Reclassification itself makes clear that

Zuckerberg intends to be and foresees himself at the helm of the Company for a

long time. Instead of being a benefit of the Reclassification or any sort of

concession by Zuckerberg, the provisions merely govern the instances in which

Zuckerberg no longer wants control over the Company or in which he has become

incapacitated such that he is unable to exert control over the Company.

43. In addition, the equal treatment provisions, whereby in any takeover

or merger Class B shares would receive the same consideration of Class A shares,

is speculative and meaningless, as a practical matter. Facebook currently has a

market cap of nearly $336 billion and is not a realistic takeover candidate. Nor,

given Delaware precedent, would a plan involving disparate treatment likely

succeed.

44. It does not appear that the Special Committee ever threatened to reject

Defendant Zuckerberg’s demands. Rather, it approached the Reclassification as


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something it must approve even if it obtained anemic and meaningless

“concessions.”

45. The Special Committee’s efforts did not approximate arm’s length

hard bargaining. The Special Committee:

(a) agreed to allow Zuckerberg to present the Reclassification to astockholder vote at the upcoming annual meeting, without any

provision for approval by a majority of the public stockholders,making the Reclassification a fait accompli, and providing the

public stockholders with no say;

(b)

never sought to have Zuckerberg pay the costs for the SpecialCommittee’s financial and legal advisors nor for the SpecialCommittee fees in connection with the Reclassification;

(c) never sought or received an opinion from its financial advisorthat the Reclassification was fair to the public Class Astockholders;

(d) obtained “concessions” from Zuckerberg that are essentially

meaningless, negating any possible claim that there was arm’s-length bargaining;

(e) allowed director Andreessen to serve on the Special Committeeas a “disinterested” member despite the close business ties

between Facebook and Andreessen’s venture capital firm,Andreessen Horowitz;

(f) never had its financial advisor place a value or range of valueson the Reclassification, from Zuckerberg’s perspective;

(g) did not prearrange compensation for the Special Committee,leaving its eventual compensation to be decided by theCompensation & Governance Committee, of which Andreessenis a member;


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(h) did not adopt any independent oversight mechanism to ensurethat future issuances of Class C shares do not unduly benefitZuckerberg;

(i)

failed to bargain for the right of public Class A stockholders toelect even one independent director, so that such stockholdersmight have a voice; and

(j) failed to provide for any compensation for the Class Astockholders whose investments will be adversely affected byhaving their holdings cleaved into voting and non-votingshares, with their meaningful consent or approval.

46. On April 13, 2016, the Special Committee met and agreed to

recommend the Reclassification to the Board. On April 15, 2016, the Board

unanimously declared that the Reclassification was advisable and in the best

interest of Facebook and its stockholders. On April 22, 2016, the Special

Committee reiterated its recommendation to proceed with the Reclassification and

the Board approved, declared advisable and recommended the Reclassification for

approve by Facebook’s stockholders.

47. On April 27, 2016, Facebook unveiled its plan to issue new shares

without diluting Zuckerberg’s voting power or threatening his domination of

Facebook. The Reclassification, which would be effected pursuant to an

Amendment to the Company’s Certificate of Incorporation, would allow the

Company to create a new class of non-voting stock that could be distributed to

existing Class A and Class B stockholders in what is effectively a 3-for-1 stock


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split. As a result of the Reclassification, Zuckerberg will be able to sell or gift his

shares to LLC, and Facebook will be able to issue stock to compensate workers or

make acquisitions using the new Class C stock, without loosening Zuckerberg’s

iron-clad grip over the Company. The Class C shares will trade separately on the

NASDAQ, which analysts believe will likely trade at a discount to the Class A

stock due to the lack of voting rights. While the Reclassification is being

submitted for a stockholder vote and is technically subject to stockholder approval

of a majority of Facebook’s outstanding shares, Zuckerberg’s 60.1% voting stake

and the lack of a majority-of-the minority condition renders the Reclassification

vote meaningless.

48. The Reclassification is interested and self-dealing and, as alleged

above, not entirely fair to the Company or its public stockholders. Because the

Reclassification will be effected pursuant to an amendment to the Company’s

Certificate of Incorporation, 8 Del. C. § 242 gives the Board an affirmative duty to

make a determination regarding and to recommend the advisability of the charter

amendment effecting the Reclassification. As discussed herein, the Special

Committee and the full Board cow-towed to Zuckerberg’s desire to obtain and

provided Zuckerberg with the non-ratable benefit of perpetual control.

49. Additionally, the fees paid to the advisors were expended by the

Company solely because Zuckerberg demanded the ability to perpetuate his control


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over the Company while still pursuing his own philanthropic endeavors and

causing the Company to make acquisitions with Company stock. The Board cow-

towed to this desire. In connection with the Reclassification, the Company

retained Evercore and paid an initial fee of $1,000,000 and agreed to an additional

monthly fee of $125,000 during the pendency of their engagement, subject to a

minimum engagement period of 12 months, for a total fee of at least $2.25 million.

The Company also retained Wachtel in connection therewith, and they will receive

an unknown fee. Additionally, the Company has stated that the Special Committee

will receive a fee to be determined by the Compensation & Nominating

Committee, of which Defendant Andreessen is a member. Thus, Zuckerberg and

the Individual Defendants caused the Company to pay millions of dollars in fees in

order to perpetuate Zuckerberg’s control over Facebook ad infinitum.

C.

THE RECLASSIFICATION IS UNFAIR

50. Several facts indicate that the Reclassification is opportunistic and

unfair to the Facebook stockholders.

Facebook’s Public Stockholders’ Voting Power Will Be Diluted

51. The Company touts the Reclassification as every stockholder,

including Zuckerberg, receiving the same, “dividend” in the form of Class C

shares, leaving the Facebook public stockholder’s economic and voting power

essentially unchanged. That is plainly untrue if one considers a vote fundamentally


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an economic right. The Facebook Board has simply redefined the value of a

shareholder vote out of existence. The Reclassification will instead rob existing

stockholders of two-thirds of their voting rights. Additionally, Zuckerberg is

getting something different than he already has in that he is receiving a perpetuated

ability to retain voting control in the future.

52. The Reclassification was proposed by Zuckerberg in order to lengthen

the period of time over which he could exercise voting control of the Company,

while providing even more asymmetry between his economic stake in Facebook

and his voting control. While Zuckerberg controls 60.1% of the voting power, he

has an approximate 16.5% economic stake in the Company. The Reclassification

will allow him to control the voting power over Facebook, which will represent

approximately one-third of his current economic stake, while allowing him to

deplete his remaining economic stake (in the form of Class C shares). Moreover,

this ploy will harm Plaintiff and the Class by losing the value in two-thirds of their

current investment, because their Class C stock will inevitably trade at a discount

to Facebook’s Class A stock and will further distance the Class from Facebook’s

corporate governance, and leaving them without a meaningful voice on important

issues that the Company will face in coming years.


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The Class C Stock Will Likely Trade at a Discount to Facebook’s Class A

Stock

53. The Company touts the Reclassification as not “initially” affecting the

relative voting power or economic interest of any Facebook stockholder.

However, this entrenchment device is novel and largely untested in American

corporate culture, and it injects an element of uncertainty into what should be a

blue-chip investment made by Facebook’s stockholders.

54. First, Class C stock will likely trade at a discount to Class A shares.

A similar reclassification effort at Google, Inc. (which is now known as Alphabet

Inc.) (“Alphabet”) in order to solidify its founders’ control while they sold down

their shares, is instructive. As demonstrated in the following chart, immediately

following the issuance of Class C shares on April 2, 2014, Alphabet’s Class C

shares traded at a discount to its Class A shares and has continued to do so in the

following two years, with a disparity of more than 5.0% in August and September

2015. And it was not until an October 2015 stock buyback of up to $5 billion of

Alphabet’s Class C shares that the disparity, while still significant, lessened.


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55. Given Alphabet’s trading price, these discounts are significant. For

example, on September 1, 2015, Alphabet’s Class C shares traded at $597.79 per

share, a 5.31% discount to Alphabet’s Class A share price of $629.56, which is

nearly a $32.00 per share difference. Based on the 345,504,021 shares of Class C

stock outstanding as of September 30, 2015, the 5.31% discount represents an $11

billion aggregate disparity. Even on April 3, 2014, Alphabet’s Class C shares

traded at $569.75 per share, a 0.31% discount to Alphabet’s Class A share price of

$571.50, which is a $1.75 per share difference. Based on the 337,246,657 shares

of Class C stock outstanding as of April 16, 2014, the 0.31% discount represents a

$590 million aggregate disparity.

-6.00%

-5.00%

-4.00%

-3.00%

-2.00%

-1.00%

0.00%

1.00%

2.00%

4 / 3 / 2 0 1 4

5 / 3 / 2 0 1 4

6 / 3 / 2 0 1 4

7 / 3 / 2 0 1 4

8 / 3 / 2 0 1 4

9 / 3 / 2 0 1 4

1 0 / 3 / 2 0 1 4

1 1 / 3 / 2 0 1 4

1 2 / 3 / 2 0 1 4

1 / 3 / 2 0 1 5

2 / 3 / 2 0 1 5

3 / 3 / 2 0 1 5

4 / 3 / 2 0 1 5

5 / 3 / 2 0 1 5

6 / 3 / 2 0 1 5

7 / 3 / 2 0 1 5

8 / 3 / 2 0 1 5

9 / 3 / 2 0 1 5

1 0 / 3 / 2 0 1 5

1 1 / 3 / 2 0 1 5

1 2 / 3 / 2 0 1 5

1 / 3 / 2 0 1 6

2 / 3 / 2 0 1 6

3 / 3 / 2 0 1 6

4 / 3 / 2 0 1 6

Discount of Stock Performance of

Alphabet Class C Stock (GOOG) to

Alphabet Class A Stock (GOOGL)


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56. Second, in addition to the likely trading discount the Class C

stockholders will face, the market for Class C stock may not fully develop, creating

liquidity issues for Facebook’s stockholders.

57. Third, while the Company has said it will use Class C non-voting

stock for employee compensation and acquisitions, it cannot be said with certainty

how employees and companies will value non-voting shares and it is possible that

acquisition targets will discount Class C shares, forcing Facebook to pay for such

companies at a premium, causing downward pressure on the Class C stock trading

price.

58. Finally, future acquisitions, which, based on Facebook’s track record,

are likely to be for billions of dollars would require even more Class C shares, also

causing downward pressure on the Class C stock trading price.

Founder Control Considerations

59. Zuckerberg’s, and therefore Facebook’s, mission is purportedly to

connect the world, contradicting his fiduciary obligations. According to an April

27, 2016 TechCrunch article, entitled “Facebook is adding a new class of stock that

will help keep Zuckerberg in control,” Zuckerberg stated: “Everything we do at

Facebook is focused on our mission to make the world more open and connected. .

. . [H]elping to connect the world will always be the most important thing I do.”

Zuckerberg recently stated that being a “founder-led company” had helped


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Facebook focus on this mission. According to an August 11, 2012, Wall Street

Journal article, entitled “Netflix CEO Buys Stock in Facebook,” Zuckerberg has

also stated that he works hard to build a culture of continuous and rapid innovation,

as evidenced by Facebook’s rapid-fire acquisitions of Instagram, WhatsApp and

Oculus, worth billions of dollars all negotiated by Zuckerberg within days and all

presented to the Board as a done deal but for the technical requirement of its

approval. On Facebook’s April 27, 2016 earnings call, Zuckerberg stated “This

structure has helped us resist the short-term pressures that often hurt companies.”

60. Zuckerberg chose the best time to announce his plans to usurp from

minority stockholders the majority of their voting rights. Recent press has been

favorable to Zuckerberg. However, in a April 28, 2016 LA Times article, entitled

“How creating new Facebook stock will keep Mark Zuckerberg in control,” analyst

Richard Windsor of Edison Investment Research was quoted as saying “[w]hen

this type of structure persists, no one minds until things start to go wrong. . . .

When problems arise, founders tend to be more emotionally attached to losing

strategies than professional managers” and because no one can force them out,

companies tend to “stick with these losers far longer than they should.”

Additionally, an April 28, 2016 LA Times article, entitled “At Facebook, Mark

Zuckerberg moves to tighten the gag on shareholders – and no one can stop him,”

stated:


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Yet the effort to chisel Zuckerberg’s control into stone has the flavorof an idea that looks great right up to the moment that it doesn’t lookat all good. The shareholders’ marriage to Zuckerberg’s visions and –let’s face it – whims is hard to argue with as long as Facebook turn inresults like this. But if the engine sputters, what then? As I advisedshareholders in May 2012, just after the IPO, “[y]ou better hope hedoes everything right, because if he doesn’t he’ll be harder to get ridof than tuberculosis.

Andrew Ross Sorkin observed in his April 16, 2012 New York Times article,

“Stock Split for Google That Cements Control at the Top,”

While leaving control with [ ] founders might be fine right now, there

will very likely come a day when its shareholders will regret not blinking at what could be called ‘anti-good corporate governance.’Just think about other once highflying technology companies thatturned sour. Yahoo. Or Research in Motion. Its founders were oncelionized as visionaries – until they weren’t.

Indeed, with a smaller financial stake in Facebook once he has given most of his

stock to charity, Zuckerberg might be incentivized to make decisions for reasons

(such as enhancing his reputation) that hurt stockholders rather than help them.

61. Founder-led tech companies, Twitter and Alphabet (f/k/a Google,

Inc.), have faltered recently. Twitter’s latest quarter results reported a 36% in

year-over-year growth, at the bottom end of analyst expectations, it remains

unprofitable and its advertising business has showed signs of stumbling. Alphabet

has also recently missed analysts’ estimates for revenue. Additionally, among the

youthful tech companies with near-impregnable insider control are Zynga,

Groupon, and LinkedIn. Over the last two years, these companies have all


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underperformed the overall stock market. But such companies are not open to

outside advice that might improve their prospects.

62. Facebook’s big bets like WhatsApp, the messaging service, and

Oculus, its virtual reality play, have yet to pay off with immense new revenue

streams. Zuckerberg has said that he thinks it will take a decade for virtual reality

to go mainstream, but there are doubts that virtual reality will take over the way

some expect. According to an April 29, 2016 Motley Fool article, entitled “Why

Virtual Reality Might Not Be the Next Big Thing,” an Oculus executive told the

Atlantic, “It’s really hard to get headsets on the heads of hundreds of millions of

people.”

63. Additionally, Snapchat remains a thorn in Facebook’s side. Facebook

tried to buy Snapchat, a messenger service, which has 100 million daily active

users, for $3 billion in 2013, but Snapchat turned it down. Facebook’s response

was to build a clone called Slingshot, which failed. Facebook has since

experimented with incorporating many of Snapchat’s popular features, such as

ephemeral messages and photo-editing tools, but it remains to be seen if its efforts

will be successful.

64. Further, according to a September 3, 2013, a New York Times article,

entitled “Thorny Side Effects in Silicon Valley Tactic to Keep Control,” in Silicon

Valley, founders’ control has not always translated into the long-term success.


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And the grab for control may exacerbate the bad effects from the culture of

worship that surrounds these founders, leaving no one with the capacity to take

over when they leave. Microsoft has struggled to find a path without Bill Gates at

the helm. Similarly, Apple has faced significant headwinds with respect to

sustainability issues without Steve Jobs. Hewlett-Packard also struggled to adjust

its business model years after its founders’ departure.

D. ENTIRE FAIRNESS APPLIES TO THE RECLASSIFICATION

65.

The members of the Company’s Board owed and continue to owe

Facebook and its public stockholders fiduciary duties to act in the best interests of

Facebook and its stockholders. Entire fairness applies, because Zuckerberg is

Facebook’s controlling stockholder and is extracting the non-ratable benefit of

perpetual control of the Company.

66.

Even if the “independent” directors of Facebook were able to act

independently from Zuckerberg (and they did not), no committee of directors

would have been able to function effectively in these circumstances which would

require Company outsiders to negotiate with Zuckerberg, who has the best

knowledge and expertise regarding the Company and its business.

67. Under the Reclassification’s coercive and unfair structure, the

Facebook Board will be unable, under any scenario, to exercise its independent

fully informed business judgment regarding approval and recommendation of the


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Reclassification because the Facebook Board cannot make an informed judgment

in the face of Zuckerberg’s self-interest. Moreover, without a majority-of-the-

minority condition, Facebook has structured the Reclassification in such a way that

an approval of a majority of the public Facebook stockholders is not required.

68. Unless the Court prevents the Reclassification, Defendants will

engage in further breaches of their fiduciary duties to the Company and its

stockholders. These actions will result in irreparable harm to Facebook and its

public stockholders.

COUNT I

BREACH OF FIDUCIARY DUTY AGAINST

DEFENDANT ZUCKERBERG

69. Plaintiff repeats and realleges each of the foregoing allegations.

70. As a controlling stockholder, Defendant Zuckerberg owed and owes

Facebook and its stockholders the highest obligation of loyalty, entire fairness,

candor and due care.

71. Defendant Zuckerberg violated his fiduciary duties by using his

influence as Facebook’s founder, Chairman, CEO and controlling shareholder to

demand the self-dealing Reclassification used to obtain the non-ratable benefit of

Zuckerberg controlling the Company ad infinitum, to the detriment of the public

stockholders.


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72. As a direct and proximate result of Defendant Zuckerberg’s failure to

perform his fiduciary obligations, Facebook’s stockholders have sustained

significant damages.

73. Plaintiff has no adequate remedy at law.

COUNT II

BREACH OF FIDUCIARY DUTY AGAINST

ALL INDIVIDUAL DEFENDANTS

74. Plaintiff repeats and realleges each of the foregoing allegations.

75.

By virtue of their positions as directors of Facebook, the Individual

Defendants owe fiduciary duties of care and loyalty to Facebook and its

stockholders. This requires the Individual Defendants to place the interest of

Facebook and its stockholders above their own interests and/or the interests of the

Company’s directors and officers, including Zuckerberg.

76.

The Individual Defendants breached their fiduciary duties of loyalty

and care in approving the Reclassification, which created a new class of non-voting

stockholders for the sole purpose of entrenching the domination of Zuckerberg

over Facebook’s operations. The Individual Defendants did not exercise

independence or due care in approving the Reclassification, which unfairly

perpetuates Zuckerberg’s control over the Company, to the detriment of the public

stockholders.


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77. By virtue of Defendant Zuckerberg’s position as officer, director and

controlling stockholder of Facebook and by virtue of Defendant Sandberg’s

position as officer and director of Facebook, Defendants Zuckerberg and Sandberg

owe fiduciary duties of care and loyalty to Facebook and its stockholders. In

connection with the Reclassification, Defendants Zuckerberg and Sandberg used

their positions in the Company to further secure Zuckerberg’s control over the

Company, to the detriment of the public stockholders. The conduct of Defendants

Zuckerberg and Sandberg, as officers of Facebook, is not shielded by 8 Del. C. §

102(b)(7).

78. Unless enjoined by this Court, the Individual Defendants will continue

to breach their fiduciary duties and violate Delaware law to the detriment of

Facebook and its stockholders.

79.

Plaintiff and the other members of the Class have no adequate remedy

at law. Only through the exercise of this Court’s equitable powers can Plaintiff

and the Class be fully protected from the irreparable injury which Individual

Defendants’ actions threaten to inflict.

WHEREFORE, Plaintiff prays for judgment, as follow:

A. determining that this action is a proper class action, and the Plaintiff is

a proper class representative and appointing Plaintiff’s Counsel as Class Counsel;


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B. enjoining Defendants, temporarily and permanently, from taking any

steps necessary to accomplish or implement the Reclassification on terms that are

not fair and equitable and under the terms presently proposed until after a trial on

the merits of the above claims;

C. declaring that the Reclassification is in breach of the fiduciary duties

of the Individual Defendants and, therefore, any action to effect the

Reclassification is unlawful and unenforceable;

D.

to the extent, if any, the Reclassification is effected prior to the entry

of final judgment, rescinding the Reclassification or awarding damages to Plaintiff

the Class, including pre- and post-judgment interest at the statutory rate;

E. directing that Defendants account to Plaintiff and the Class for all

damages caused to them and account for all profits and any special benefits obtains

by Defendants as a result of their unlawful conduct;

F. awarding to Plaintiff the costs and disbursements of this action,

including a reasonable allowance for the fees and expenses of Plaintiff’s attorneys

and experts; and

G. granting such other and further relief as the Court deems appropriate.

Dated: May 6, 2016 CHIMICLES & TIKELLIS LLP

/s/ Pamela S. Tikellis Pamela S. Tikellis (#2172)Robert J. Kriner, Jr. (#2546)A. Zachary Naylor (#4439)


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Tiffany J. Cramer (#4998)222 Delaware Avenue, Suite 1100P.O. Box 1035Wilmington, DE 19899Phone: (302) 656-2500Fax: (302) 656-9053

Counsel for Plaintiff

southeastern penn. trans. auth. v. zuckerberg et al - shareholder class action complaint.pdf

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